Growth is stronger in the G-20 but progress toward more balanced, sustainable, and inclusive growth is slow (photo: Egon Bömsch imageBROKER/Newscom)

This blog is dedicated to the memory of Giang Ho, an IMF economist who died suddenly this past August. Her efforts and ingenuity were critical to carrying out this analytical work. We miss her and will never forget her.

How close has the Group of Twenty (G-20) come to its goal of strong, sustainable, balanced, and inclusive growth? The global expansion remains strong—so there is little surprise that the IMF’s 2018 report gives the G-20 good grades on the short-term outlook. Compared to last year’s report, output gaps have been closing (meaning actual output is closer to potential) and fewer people are unemployed, although risks have increased. At the same time, progress toward more sustainable and balanced growth has been slow, as external excess imbalances (surpluses and deficits) persist, debt levels remain high, and productivity growth remains low. Inclusion—whose analysis is new to this year’s report—remains a challenge.

Inclusive growth remains elusive

The G-20 has emphasized inclusive growth as a stand-alone policy goal but ensuring that growth benefits all also tends to go hand-in-hand with achieving sustainable growth. For example, political support for structural reforms is higher if the resulting income gains are more widely shared.

Yet, after 1990, inequality as measured by the Gini coefficient rose across most G-20 economies, and it remains high even in some emerging economies where it fell over that period (the red areas in the map show an increase in inequality while the green areas show a decrease). For instance, while inequality declined substantially in many Latin American countries and Turkey it remains higher than in G-20 European and North American countries, who over the same period saw their levels of inequality rise.

Indeed, income gains have remained highly uneven after the financial crisis: across the G-20, earners in the bottom 10 percent of the income distribution, on average, earn only 8 percent of what earners in the top 10 percent make. Such persistent inequalities reflect and reinforce uneven access to economic opportunities, such as education, health care, and financial services.

Policymakers can make a difference

By acting now and working together, the G-20 have a chance to sustain strong global growth over the medium term, to make it more balanced, and to ensure that it is more widely shared. Importantly, many of the measures that would lift productivity over the medium and long term—which we estimate will increase the level of G-20 GDP by close to 4 percent—will also make growth more inclusive.

Inclusive growth across most G-20 economies remains a challenge.

Investment in human capital is a key example. Investing in and strengthening education and workers’ skills will not only help the G-20 economies to better adjust to advancing new technologies that may alter the “future of work,” they will also ensure that more people benefit from technological progress. Enhancing financial inclusion and adjusting social safety nets and insurance systems to facilitate mobility across jobs, sectors, and borders will do the same. In addition, redistribution through taxes and transfers will continue to play a major role in the quest for more inclusive growth across the G-20.

The G-20 Surveillance Note—to be released on November 27—will outline how policymakers must work, in parallel and together, to contain risks, which will also help reduce inequality. For example, reducing barriers to trade in services promises not only to temper the risks from excess external imbalances, thereby reducing trade tensions, it will also help lift incomes. Together with the right policies to ensure that growth is widely shared, this will help advance the G-20 toward its goal of strong, sustainable, balanced, and inclusive growth.

Women are currently underrepresented in fields experiencing job growth, such as engineering and information and communication technology (photo: Vgajic/iStock by Getty Images)

The way we work is changing at an unprecedented rate. Digitalization, artificial intelligence, and machine learning are eliminating many jobs involving low and middle-skill routine tasks through automation.

Our new research finds the trend toward greater automation will be especially challenging for women.

More than ever, women will need to break the glass ceiling.

On average, women face an 11 percent risk of losing their jobs due to automation, compared to 9 percent of their male counterparts. So while many men are losing their jobs to automation, we estimate that 26 million women’s jobs in 30 countries are at high risk of being displaced by technology within the next 20 years. We find that women’s jobs have a 70 percent or higher probability of automation. This translates globally to 180 million women’s jobs.

We must understand the impact of these trends on women’s lives if we are to gain gender equity in the work place.

What policies can countries implement now to ensure that women contribute to the economy, while moving toward greater automation?

Women at higher risk

Hard-won gains from policies to increase the number of women in the paid workforce and to increase women’s pay to equal men’s may be quickly eroded if women work predominantly in sectors and occupations that are at high risk of being automated.

Women who are 40 and older, and those in clerical, service, and sales positions are disproportionately at risk.

Nearly 50 percent of women with a high school education, or less, are at high risk of their jobs being automated, compared to 40 percent of men. The risk for women with a bachelor’s degree or higher is 1 percent.

The chart below shows how the automation of jobs effects people in different countries. Men and women in the United Kingdom and the United States face about the same amount of risk for job automation. In Japan and Israel, women’s jobs are more vulnerable to automation than men’s. Women’s jobs in Finland are less vulnerable to automation than men’s.

Opportunities and challenges

Women are currently underrepresented in fields experiencing job growth, such as engineering and information and communications technology. In tech, women are 15 percent less likely than men to be managers and professionals, and 19 percent are more likely to be clerks and service workers performing more routine tasks, which leaves women at a high risk of displacement by technology.

More than ever, women will need to break the glass ceiling. Our analysis shows that differences in routineness of job tasks exacerbate gender inequality in returns to labor. Even after taking into account such factors as differences in skill, experience and choice of occupation, nearly 5 percent of the wage gap between women and men is because women perform more routine job tasks. In the US this means women forfeit $26,000 in income over the course of their working life.

There are some bright spots. In advanced and emerging economies, which are experiencing rapid aging, jobs are likely to grow in traditionally female-dominated sectors such as health, and social services―jobs requiring cognitive and interpersonal skills and thus less prone to automation. Coping with aging populations will require both more human workers and greater use of artificial intelligence, robotics, and other advanced technologies to complement and boost productivity of workers in healthcare services.

Policies that work

Governments need to enact policies that foster gender equality and empowerment in the changing landscape of work:

Provide women with the right skills. Early investment in women in STEM fields, like the program Girls Who Code in the US, along with peer mentoring, can help break down gender stereotypes and increase women in scientific fields. Tax deductions for training those already in the workforce, like in the Netherlands, and portable individual learning accounts, like in France, could help remove barriers to lifelong learning.

Close gender gaps in leadership positions. Providing affordable childcare and replacing family taxation with individual taxation, like in Canada and Italy, can play an important role in boosting women’s career progression. Countries can set relevant recruitment and retention targets for organizations, as well as promotion quotas, like in Norway, and establish mentorship and training programs to promote women into managerial positions.

Bridge the digital gender divide. Governments have a role to play through public investment in capital infrastructure and ensuring equal access to finance and connectivity, like in Finland.

Ease transitions for workers. Countries can support workers as they change jobs because of automation with training and benefits that are linked to individuals rather than jobs, like the individual training accounts in France and Singapore. Social protection systems will need to adapt to the new forms of work. To address deteriorating income security associated with rapid technological change, some countries may consider expansion of non-contributory pensions and adoption of basic income guarantees may be warranted.

Automation has made it even more urgent to step up efforts to level the playing field between men and women, so that all have equal opportunities to contribute to, and benefit from, the new more technology-enabled world.

A drilling crew member raises a pipe on an oil rig in Texas: Energy is among the industries in which leveraged lending is most prevalent, along with telecommunications, health care, and technology (photo: Nick Oxford/Reuters/Newscom)

We warned in the most recent Global Financial Stability Report that speculative excesses in some financial markets may be approaching a threatening level. For evidence, look no further than the $1.3 trillion global market for so-called leverage loans, which has some analysts and academics sounding the alarm on a dangerous deterioration in lending standards. They have a point.

This growing segment of the financial world involves loans, usually arranged by a syndicate of banks, to companies that are heavily indebted or have weak credit ratings. These loans are called “leveraged” because the ratio of the borrower’s debt to assets or earnings significantly exceeds industry norms.

With interest rates extremely low for years and with ample money flowing though the financial system, yield-hungry investors are tolerating ever-higher levels of risk and betting on financial instruments that, in less speculative times, they might sensibly shun.

For their part, speculative-grade companies have been eager to load up on cheap debt. Globally, new issuance of leveraged loans hit a record $788 billion in 2017, surpassing the pre-crisis high of $762 billion in 2007. The United States was by far the largest market last year, accounting for $564 billion of new loans.

Underwriting standards and credit quality have deteriorated.

So far this year, issuance has reached an annual rate of $745 billion. More than half of this year’s total involves money borrowed to fund mergers and acquisitions and leveraged buyouts (LBOs), pay dividends, and buy back shares from investor—in other words, for financial risk-taking rather than plain-vanilla productive investment. Most borrowers are technology, energy, telecommunications, and health care firms.

At this late stage of the credit cycle, with signs reminiscent of past episodes of excess, it’s vital to ask: How vulnerable is the leveraged-loan market to a sudden shift in investor risk appetite? If this market froze, what would be the economic impact? In a worst-cast scenario, could a breakdown threaten financial stability?

It is not only the sheer volume of debt that is causing concern. Underwriting standards and credit quality have deteriorated. In the United States, the most highly indebted speculative grade firms now account for a larger share of new issuance than before the crisis. New deals also include fewer investor protections, known as covenants, and lower loss-absorption capacity. This year, so-called covenant-lite loans account for up 80 percent of new loans arranged for nonbank lenders (so-called “institutional investors”), up from about 30 percent in 2007. Not only the number, but also the quality of covenants has deteriorated.

Furthermore, strong investor demand has resulted in a loosening of nonprice terms, which are more difficult to monitor. For example, weaker covenants have reportedly allowed borrowers to inflate projections of earnings. They have also allowed them to borrow more after the closing of the deal. With rising leverage, weakening investor protections, and eroding debt cushions, average recovery rates for defaulted loans have fallen to 69 percent from the pre-crisis average of 82 percent. A sharp rise in defaults could have a large negative impact on the real economy given the importance of leveraged loans as a source of corporate funding.

A significant shift in the investor base is another reason for worry. Institutions now hold about $1.1 trillion of leveraged loans in the United States, almost double the pre-crisis level. That compares with $1.2 trillion in high yield, or junk bonds, outstanding. Such institutions include loan mutual funds, insurance companies, pension funds, and collateralized loan obligations (CLOs), which package loans and then resell them to still other investors. CLOs buy more than half of overall leveraged loan issuance in the United States. Mutual funds that invest in leveraged loans have grown from roughly $20 billion in assets in 2006 to about $200 billion this year, accounting for over 20 percent of loans outstanding. Institutional ownership makes it harder for banking regulators to address potential risk to the financial system if things go wrong.

Regulators in the United States and Europe have taken steps in recent years to reduce banks’ exposures and to curb market excesses more broadly. The effectiveness of these steps, however, remains an open question. For example, there is evidence that these actions have contributed to a shift of activities from banks to institutional investors. These investors have different risk profiles and may pose different risks to the financial system than banks.

While banks have become safer since the financial crisis, it is unclear whether institutional investors retain a link to the banking sector, which could inflict losses at banks during market disruptions. Furthermore, few tools are available to address credit and liquidity risks in global capital markets. So it is crucial for policymakers to develop and deploy new tools to address deteriorating underwriting standards. Having learned a painful lesson a decade ago about unforeseen threats to the financial system, policymakers should not overlook another potential threat.

Increasing access to affordable and high-quality childcare can make it easier for families to have more children (photo: Franziska Kraufmann/dpa/Newscom)

The global financial crisis a decade ago and the resulting recession left long-lasting scars on future growth in more ways than one.

Our October World Economic Outlook points to signs that the crisis may have had lasting effects on potential economic growth through its impact on fertility rates and migration, as well as on income inequality.

Our chart of the week shows that in the decade before the crisis, the fertility rate—the number of children each woman is expected to have in her lifetime—rose in several advanced economies, only to decline afterward.

The crisis may have had lasting effects on potential economic growth through its impact on fertility rates and migration.

In the United States, the rate fell from a peak of 2.12 in 2007 to 1.8 in 2016. For European countries, such as Greece and Spain that suffered a double-dip recession, the fertility rate decreased from 1.5 to about 1.3 over the same time period.

Evidence from Organisation for Economic Co-operation and Development countries shows that employment losses were the most important channel through which the crisis affected fertility rates. Other studies find that complex social changes—such as higher women’s participation in the workforce and a desire for smaller families—as well as cuts to welfare systems could affect women’s decisions about family size.

The persistently low birth rates over the past decade will slow the growth rate of the labor force of the future in these countries, which will weaken potential output growth. And, if immigration were to decline, fewer babies will exacerbate the already aging and shrinking populations of many countries.

Policymakers in some advanced economies will need to tackle this trend and find ways to encourage women to have children. For example, increasing access to affordable and high-quality childcare, family-friendly labor laws, and tax policies that do not penalize secondary earners can make it easier for families to have more children.

The graves of soldiers who died in World War I, near Verdun, France: on the 100th anniversary of the end of the Great War, leaders should listen closely to the echoes of history (photo: Mathieu Pattier/SIPA/Newscom)

Mark Twain once said that “History never repeats itself, but it does often rhyme.” As heads of state gather in Paris this week to mark 100 years since the end of World War I, they should listen closely to the echoes of history and avoid replaying the discordant notes of the past.

For centuries, our global economic fortunes have been shaped by the twin forces of technological advancement and global integration. These forces have the prospect to drive prosperity across nations. But if mismanaged, they also have the potential to provoke calamity. World War I is a searing example of everything going wrong.

The 50 years leading up the to the Great War were a period of remarkable technological advances such as steamships, locomotion, electrification, and telecommunications. It was this period that shaped the contours of our modern world. It was also a period of previously unprecedented global integration—what many refer to as the first era of globalization, where goods, money, and people could move across borders with relatively minimal impediments. Between 1870 and 1913 we saw large gains in exports as a share of GDP in many economies—a sign of increasing openness.

Today, we can find striking similarities with the period before the Great War.

Then, as now, rising inequality and the uneven gains from technological change and globalization contributed to a backlash. In the run-up to the war countries responded by scrambling for national advantage, forsaking the idea of mutual cooperation in favor of zero-sum dominance. The result was catastrophe—the full weight of modern technology deployed toward carnage and destruction.

And in 1918, when leaders surveyed the corpse-laden poppy fields, they failed to draw the correct lessons. They again put short-term advantage over long-term prosperity—retreating from trade, trying to recreate the gold standard, and eschewing the mechanisms of peaceful cooperation. As John Maynard Keynes—one of the IMF’s founding fathers—wrote in response to the Versailles Treaty, the insistence on imposing financial ruin on Germany would eventually lead to disaster. He was entirely correct.

It took the horrors of another war for world leaders to find more durable solutions to our shared problems. The United Nations, the World Bank, and of course the institution I now lead, the IMF, are a proud part of this legacy.

And the system created after World War II was always meant to be able to adapt. From the move to flexible exchange rates in the 1970s to the creation of the World Trade Organization, our predecessors recognized that global cooperation must evolve to survive.

Today, we can find striking similarities with the period before the Great War—dizzying technological advances, deepening global integration, and growing prosperity, which has lifted vast numbers out of poverty, but unfortunately has also left many behind. Safety nets are better now and have helped, but in some places we are once again seeing rising anger and frustration combined with a backlash against globalization. And once again, we need to adapt.

That is why I have recently been calling for a new multilateralism, one that is more inclusive, more people-centered, and more accountable. This new multilateralism must reinvigorate the previous spirit of cooperation while also addressing a broader spectrum of challenges—from financial integration and fintech to the cost of corruption and climate change.

Each of us—every leader and every citizen—has a responsibility to contribute to this rebuilding.

After all, what was true in 1918 is still true today: The peaceful coexistence of nations and the economic prospects of millions depends squarely on our ability to discover the rhymes within our shared history.

Power Plant, Abidjan, Cote d’Ivoire. The G20 Compact with Africa was initiated under the German G20 Presidency to promote private investment in Africa, including in infrastructure. So far, eleven African countries have joined the initiative: Benin, Côte d’Ivoire, Egypt, Ethiopia, Ghana, Guinea, Morocco, Rwanda, Senegal, Togo and Tunisia (photo: Thierry Gouegnon/Reuters/Newsom)

The Compact with Africa focuses on a fundamental challenge for the continent: how to accelerate private sector investment and create jobs. To realize its full potential, all parties need to deliver.

The central idea behind the Compact is a simple one: create a platform for closer coordination between African countries, international organizations, and bilateral G20 partners to support economic, business, and financial sector reforms that will attract private investment.

Sixteen months on from the Berlin Summit that effectively launched the initiative, we can, and should, ask ourselves whether Compact countries and their international partners are doing enough to fully implement the initiative, and where we can make further progress.

Growth prospects for most Compact countries are favorable, although in many cases, including Egypt, Ethiopia, and Ghana, the fiscal space to scale-up public investment is constrained by elevated public debt levels. With limited room for additional borrowing, countries also need to boost domestic tax revenues and increase the efficiency of public spending to fund higher public investment.

To deliver on the Compact's full potential, reform-minded countries in Africa, international organizations, and G20 partners need to row together.

Equally critical to private investment is coordination between governments and partners. This has been highly effective in some countries, such as Ghana and Morocco—but less so in others. Implementing the ambitious and country-specific reform commitments under the Compact requires strong ownership by African countries, and stepped-up engagement and support from Compact partners to ensure adequate capacity and financing during implementation.

Development partners need to provide fine-tuned public support—such as risk mitigation instruments—to leverage private sector investment. The growing involvement of development finance institutions in G20 countries is welcome. They can contribute extensive expertise in the design and financing of large investment projects.

Stepping up to attract more private investment

Attracting private investment requires connecting countries directly with private investors, as was on display at the recent Germany-Ghana Investors “Virtual” Forum. Other G20 partners could step up their game in this area, including through funding of road shows and peer-learning events that bring together Compact countries and potential investors.

Of course, all these reforms take time and require strong ownership. We must be realistic about how quickly projects can be developed and implemented, and about the challenge of overcoming political opposition in some cases. But the potential rewards of meaningful economic reforms are worth the wait.

The IMF actively supports the Compact

The IMF continues to work closely with Compact countries to build strong macroeconomic, business, and financial frameworks that will encourage a scaling-up of private investment. We maintain a close policy dialogue with all 12 Compact countries, and IMF-supported programs are in place in 10 of those countries.

Our capacity development works to strengthen key public institutions. During 2017 and 2018, the Fund fielded 129 technical assistance missions in Compact countries and trained more than 1,700 government officials, in areas including tax administration, public investment management capacity, and financial sector supervision, to name a few.

A “win-win” collaboration

We continue to actively support the Compact process—a pragmatic “win-win” collaboration between advanced and developing countries. Achieving success in the current Compact countries will lay the basis for expanding the initiative across the continent.

A final thought in closing. In the next decade, 140 million children will come of age in the 12 Compact countries. Increasing private investment is not an abstract concept in terms of those children’s future—it is an imperative if they are to enter productive employment, and thereby deliver on Africa’s demographic dividend. Failure to meet this job creation challenge is not an option—and we have the tools and instruments to achieve success.

Over the past few weeks, we at the IMF have been making a case that this is not a time for complacency in the global economy. We must steer, not drift. The same is true of the Compact with Africa. To deliver on its full potential, reform-minded countries in Africa, international organizations, and G20 partners need to row together.

The many 10th anniversary retrospectives of the global financial crisis mostly agree: the financial system is safer today than it was when US investment bank Lehman Brothers collapsed in 2008. In some respects, the IMF’s recent Global Financial Stability Report supports that conclusion. Capital, liquidity, and banking sector leverage have improved.

But policymakers shouldn’t rest on their laurels. The Chart of the Week offers a more granular look at the progress (or lack of it) on banking sector regulation and supervision since the crisis on a number of dimensions. It finds that while there has been improvement in many areas, significant trouble spots remain. (The chart focuses on banking, but similar issues arise in our assessment of securities and insurance regulation and supervision.)

Policymakers shouldn’t rest on their laurels.

Across the financial sector, two of the most problematic areas are corporate governance and regulatory oversight. Before the crisis, weak corporate governance gave rise to risky exposures, often driven by flawed incentives that rewarded quick profits. What is more, many supervisors lacked the independence, accountability, resources, and legal protections they needed to properly oversee financial institutions. Those weaknesses have yet to be fixed.

While progress varies by country, the chart shows average compliance levels over time for 37 nations. It is based on assessments of banking regulation and supervision frameworks between 2013 and 2017. The left hand column shows average compliance levels from 2013 to the first half 2014; the right-hand column shows levels from the second half of 2014 to 2017. The two periods of time, though different, encompass roughly equal numbers of assessments.

Levels vary from high compliance (green) to low compliance (red) for each of the 29 Core Principles for Effective Banking Supervision established by the Basel Committee for Banking Supervision, the global standard setter for the regulation of banks.

Among the other areas of weakness:

Transactions with related parties, such as shareholders, subsidiaries and other group companies

Operational risk, or breakdowns in internal procedures and systems, including defenses against cyber risk

Abuse of financial services, or making sure banks aren’t being used for money laundering or other criminal activities

Supervisory approach, or developing a forward-looking risk assessment of banks’ risk profile and effective approaches to early intervention and resolution

Risk management process to identify, evaluate, monitor, and control risks.

The compliance assessments are drawn from the Financial Stability Assessment Program, conducted jointly by the Fund and the World Bank. Its goal is twofold: to gauge the stability and soundness of a country’s financial sector and to assess its potential contribution to growth and development. More than three-quarters of the Fund’s 189 members have undergone assessments.

More analytical work on compliance assessments of the Basel Committee’s core principles will follow. For now, the key take-away is that while progress on the global regulatory reform agenda has been impressive, more work is needed to ensure the stability of the financial system. This is no time for complacency.

]]>https://blogs.imf.org/2018/10/29/chart-of-the-week-financial-reform-report-card/feed/0Chart of the Week: Government Debt Is Not the Whole Story: Look at the Assetshttps://blogs.imf.org/2018/10/23/chart-of-the-week-government-debt-is-not-the-whole-story-look-at-the-assets/
https://blogs.imf.org/2018/10/23/chart-of-the-week-government-debt-is-not-the-whole-story-look-at-the-assets/#respondTue, 23 Oct 2018 12:40:20 +0000https://blogs.imf.org/?p=24905By IMFBlog

October 23, 2018

The Millennium Bridge in London, England: governments often don’t include the value of their assets, like bridges and roads, as well as natural resources, when they measure public wealth (Ingram Publishing/Newscom)

Lost track of your personal finances? You are not alone. Your government has often lost track of its finances too. While it keeps close tabs on debt, it is less clear on how much it owns: the assets.

Things like roads, bridges, and sewer pipes are assets for a country, as well as the money governments have in the bank, their financial investments, and payments owed to them by individuals and businesses.

Natural resource reserves in the ground are also part of assets, something that is particularly important for natural resource-rich countries like Nigeria and Norway. But assets also include state-owned enterprises such as public banks and, in many countries, utilities such as public electricity and water companies.

Our Chart of the Week from the new Fiscal Monitor analyzes public wealth using 2016 data from 31 countries—from The Gambia, to the United States, as well as Japan, Turkey, Brazil, the United Kingdom and China, to name a few. Their assets amount to $101 trillion, or 219 percent of GDP.

Who owns what

Let’s look at the United Kingdom. The research shows how its balance sheet expanded massively during the global financial crisis, when the government decided to rescue several large private sector banks. This rescue substantially contributed to the increase in the UK’s public sector net debt, which is the total amount of debt minus the government’s cash in hand.

Then there’s the United States, whose public sector balance sheet features large financial assets. Most of them are held in pension funds and government-sponsored enterprises. The Fiscal Monitor includes them on the balance sheet and shows that a US recession would erode net worth—the value of assets minus liabilities— by some 26 percent of GDP under stress.

Your government has often lost track of its finances.

Japan is an interesting case, where gross public sector debt stood at some 283 percent of GDP at the end of 2017. However, other parts of the public sector hold over half of this debt. The private sector holds a smaller—but still sizeable—amount of public debt worth 134 percent of GDP.

Improve resilience

More generally, the research illustrates that public sector assets could act as a buffer that allows governments with high public wealth to weather recessions better than those with low public wealth. Stronger balance sheets—a statement of what you owe and own at a given point in time—allow governments to boost spending in a downturn.

Doable for all

All governments can better manage their resources. They should start by bringing data together to come up with a rough estimate of public sector assets, liabilities, and wealth. Over time, better accounting and statistical collections can improve the accuracy of these estimates. Governments can use them to do basic balance sheet risk and policy analysis, using the framework presented in this report.

Once governments complete this exercise they will be able to show their citizens the full extent of what they own and owe, and better use public wealth to meet society’s economic and social goals.

When it comes to central banks in Latin America, sometimes words can speak louder than actions.

This is because the public and investors rely on central bank communications to make economic and financial decisions. So, clear and consistent communications from a central bank about policy decisions and the economic outlook are essential to guide market expectations.

This chart of the week from the Regional Economic Outlook: Western Hemisphere shows that, it is not just a matter of how much central banks communicate, but the quality and clarity of information as well. Using articles from the business section of local newspapers as benchmarks for high readability and clarity of communication, we found that central banks in Chile and Colombia have improved their communication over the years.

Recently, there has been a push across the region to improve the transparency of central banks. For example, in Brazil and Mexico, press releases to the public have become more detailed—providing a comprehensive explanation behind policies and inflation risks.

While transparency is good, wordy and dense documents, however, are not. They tend to be confusing to the reader and can increase uncertainty about future policy actions. We found that when banks communicate in the language more understood by the general public, their monetary policy decisions are seen as more predictable and credible.

This includes shorter statements with simpler words and sentence structure. For instance, we found that the text length of Chile and Peru’s central bank press releases are relatively shorter compared to other regional central banks. It comes as no surprise, then, that these countries communications scored a high ease of readability, as the chart shows.

How to communicate

So, what can the region’s central banks do to communicate more effectively? Central banks need to be more transparent and provide markets with explicit guidance and clarity on:

Enhancing transparency through better communication is vital for central banks because transparency helps to increase predictability of policies.

With predictability, the public can anticipate the central bank’s decisions, which can better align the public’s medium-term inflation expectations with the central bank’s objectives. This strengthens the impact of monetary policy changes and gives central banks more credibility.

Transparency and communications are not a panacea but, ultimately, implementing these strategies can help strengthen central banks in Latin America.

A firefighter in Auckland, New Zealand: when governments know what they own they can put their assets to better use and can earn about 3 percent of GDP more in revenues to spend on citizens’ well being (Photo: Rafael Ben-Ari/Newscom)

What is the state of your personal finances? You probably think first about your debts: your mortgage, your credit card balance, and your student loans. But you probably also think about how much cash is sitting in the bank, the value of your house, and the rest of your nest egg.

Surprisingly, most governments do not approach their finances this way.

Our research in the new Fiscal Monitor shows that few governments know how much they own, or how they use those assets for the public’s well-being. Knowing what a government owns and how they can put their assets to better use matters because they can earn about 3 percent of GDP more in revenues each year and reduce risks, all at once. That’s as much revenue as governments make from corporate income tax receipts in advanced economies. Governments can put this money toward better schools, hospitals, or other priority spending.

Few governments know how much they own.

It’s what you own, not just what you owe

In the Fiscal Monitor we analyze public wealth using data from 31 countries. We show that their assets amount to $101 trillion, or 219 percent of GDP.

These assets consist of public infrastructure such as roads, bridges, and sewer pipes, as well as the money governments have in the bank, their financial investments, and payments owed to them by individuals and businesses.

Natural resource reserves in the ground are also part of assets, something that is particularly important for natural resource-rich countries. But assets also include state-owned enterprises such as public banks and, in many countries, utilities such as public electricity and water companies.

We also show that total liabilities are much larger than debt alone. They come to about 198 percent of GDP, less than half of which is general government public debt. Pension obligations to civil servants are a large part of the remainder, yet few countries record them as such.

Another part is debt owed by public corporations. Most standard measures of general government debt do not include this, meaning that significant amounts of public debt are classified as private debt.

Emerging markets’ debts and assets

In emerging market economies private debt has risen much faster than public debt, as shown in the chart below. Take China, for example. Total debt is 247 percent of GDP. But the dividing line between what is public and private debt in China is blurry. This blurriness reflects the very large number of public units and corporations, the complex layers of government, and widespread subnational off-budget borrowing.

As a result, estimates of 2017 public debt vary considerably: the official government debt figure is 37 percent of GDP, while the data reported in the latest World Economic Outlookshow it at 47 percent of GDP, and the ‘augmented’ debt measure, which includes more off-budget borrowing by local governments, stands at 68 percent of GDP. As China works to compile a full general government balance sheet, this picture will come into clearer focus.

So, how resilient is China’s government balance sheet?

China has substantial government assets, reflecting years of high infrastructure investment. These assets are larger than its liabilities, putting net worth—the difference between assets and liabilities—well above 100 percent of GDP, the highest among emerging economies.

This is a significant buffer when compared to total debts of public corporations, particularly considering that public corporations also have assets. So, while debt-related risks in China are large, there are also buffers. Moreover, the government is taking steps to contain risks by reining in off-budget borrowing and strengthening oversight, resulting in a slowdown in the buildup of debt.

However, most of China’s government assets are nonfinancial, like buildings, roads, and railways. While they can generate revenues through fees and rents, they are not easily available to cover liquidity needs. Also, the valuation of these assets is surrounded by uncertainty. With no official estimates available, we use an estimate from our capital stock database. Net financial worth, which excludes these nonfinancial assets, is much smaller. It still positive and higher than the emerging market average, although it has declined in recent years, mainly due to developments at the subnational government level.

Improve resilience

More generally, our research illustrates that public sector assets could act as a buffer that allows governments with high public wealth to weather recessions better than those with low public wealth. Stronger balance sheets—a statement of what you owe and own at a given point in time—allow governments to boost spending in a downturn.

This cushions the impact of the shock and results in shorter and shallower recessions. Take Kazakhstan in 2014, when it faced a halving of oil prices and a slump in external demand. The government responded by using part of its financial assets in the National Fund to ease the downturn.

Doable for all

All governments can better manage their resources. They should start by bringing data together to come up with a rough estimate of public sector assets, liabilities, and wealth. Over time, better accounting and statistical collections can improve the accuracy of these estimates. Governments can use them to do basic balance sheet risk and policy analysis, using the framework presented in this report.

Once this exercise is completed, governments will be able to show their citizens the full extent of what they own and owe, and better use public wealth to meet society’s economic and social goals.